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January 2020
Market Update
(all values as of 04.30.2024)

Stock Indices:

Dow Jones 37,815
S&P 500 5,035
Nasdaq 15,657

Bond Sector Yields:

2 Yr Treasury 5.04%
10 Yr Treasury 4.69%
10 Yr Municipal 2.80%
High Yield 7.99%

YTD Market Returns:

Dow Jones 0.34%
S&P 500 5.57%
Nasdaq 4.31%
MSCI-EAFE 1.98%
MSCI-Europe 2.05%
MSCI-Pacific 1.82%
MSCI-Emg Mkt 2.17%
 
US Agg Bond 0.50%
US Corp Bond 0.56%
US Gov’t Bond 0.48%

Commodity Prices:

Gold 2,297
Silver 26.58
Oil (WTI) 81.13

Currencies:

Dollar / Euro 1.07
Dollar / Pound 1.25
Yen / Dollar 156.66
Canadian /Dollar 0.79
 

Macro Overview

Financial markets experienced a bountiful decade for stocks and bonds, bolstered by innovative technological advances and a low-interest-rate environment fostered by the Federal Reserve. The 2010s was the first decade in U.S. history to avoid a domestic economic recession, with accelerated growth in various sectors including technology, healthcare, and industrials.

A calm in the markets was displaced as tensions in the Middle East spurred concern early in the new year. Global equity, bond, and commodity markets reacted to developments in the region that unleashed a tsunami of unease as the U.S. and Iran faced off over the repercussions of the death of Iranian military leader Major General Qasem Soleimani.

International markets advanced in 2019, propelled by low interest rates and a gradual global expansion. Robust gains in global equity markets occurred against a backdrop of negative rates in parts of the world, traditionally representative of dismal economic dynamics. The Federal Reserve plans to keep rates steady, with no expected increases or decreases unless inflationary pressures become prevalent. Inflation has been surprisingly subdued, despite the unemployment rate sitting at a 50-year low alongside gradual economic expansion.

The IRS is providing annual inflation adjustments for over 60 tax provisions, including tax rate schedules, exemptions, and standard deductions. Notable increases affecting many taxpayers include the standard deduction for those married, filing jointly increased to $24,800, and 401k contribution limits increased to $19,500 for 2020. The tax code provision allowing for a $3,000 write-off for capital losses, applicable to stocks and mutual funds, is an unindexed provision that is will not be changing this year and hasn’t seen an increase since 1977.

The Federal Reserve continued to inject liquidity into the financial markets by buying bonds and actively participating in the repo market at the end of 2019. Many analysts believe that the Fed’s actions have dampened volatility prompted by the recent geopolitical upheaval in the Middle East. (Sources: IRS, Labor Dept., Federal Reserve, CBO.gov., U.S. Treasury, Tax Policy Center)

 
Total stock market value increased $7.5 trillion in 2019

Global Equities Advanced In 2019 – Stock Market Overview 

In sharp contrast to 2018, equity markets advanced in 2019 with gains not seen since 2013. Technology, financials, and communications were the leading S&P 500 sectors in 2019. Total stock market value increased $7.5 trillion for the year.

The equity market rebound from its topple in December 2018 was unexpected by many analysts, as 2019 began with expectations of a recession and further market downturn. International markets advanced broadly in 2019, with gains in both developed and emerging markets. Global bond markets have been favorable for stocks as historically low rates during the past decade incentivized governments and companies worldwide to borrow, boosting growth in expansion and capital investments globally.

The price/earnings ratio for the S&P 500 Index ended 2019 at 18.3, up from 15.6 at the end of 2018. Analysts view this ratio as an indicator for future expectations regarding the equity market.  (Sources: Bloomberg, S&P)

Rates Expected To Stay Steady – Global Fixed Income Overview

Fixed income markets are expecting that the Federal Reserve will maintain interest rates steady through 2020. Performance was positive across all bond sectors in 2019, with yields stabilizing toward the end of the year. Ending the year at 1.92%, the yield on the 10-year Treasury bond is still the highest yield available among the developed government bond markets. Government bond yields in developed economies including Germany and Japan were still negative at the end of the year.

To shore up liquidity at the end of 2019 and avert a market disruption like the one that occurred in December 2018, the Fed injected billions of dollars into the repurchase-agreement market, also known as the repo market, and has also bought roughly $400 billion of bonds since October 2019. The strategy has been very similar to the Fed’s quantitative easing program enacted during the financial crisis, also known as Q.E. (Sources: Federal Reserve, U.S. Treasury)

 

 
There over 4.3 billion users of the internet globally, 56% of the earth’s population

Low Mortgage Rates and Higher Home Prices – Housing Market 

A decade ago when the financial crisis was still a recent threat, the Federal Reserve embarked on a massive stimulus campaign to fortify and expand the housing market for millions of Americans. The objective was to facilitate low mortgage rates that would make home-buying an affordable investment. Although mortgage rates dropped to unprecedented low levels of below 4%, housing became unaffordable for many as housing prices accelerated.

Higher wages tend to drive higher housing prices, as increased wages enable workers to pay more for monthly mortgage payments. However, the rise in home prices over the past decade was largely attributable to the ultra-low mortgage rates. The past decade saw the average home price, as measured by Freddie Mac, rise 50% from 2010 to 2019, while wages, as measured by the Bureau of Labor Statistics, rose 29% over the same period. (Sources: Freddie Mac, Bureau of Labor Statistics, Federal Reserve)

Growth of Internet Use Varied Among Global Regions – Global Commerce 

The 2010s witnessed a dramatic increase in internet users worldwide. Over 4.3 billion people used the internet globally in 2019, which accounted for nearly 56% of the earth’s total population. Limitations to internet expansion have primarily been related to infrastructure. Remote regions with little or no electricity and connectivity have had the greatest challenges. Interestingly, emerging countries have seen more internet growth than many developed nations.

Emerging global regions including Asia and the Middle East saw internet users more than double over the decade, as developed regions including North America and Europe saw less growth. Demographic differences play a role: younger populations, characteristic of emerging countries, are more prominent internet users. Additionally, emerging regions generally started the decade with limited internet accessibility, and the relative outsize growth rates in internet use are largely indicative of these regions playing catch-up. (Sources: World Bank, FRED)

 
The required minimum distribution (RMD) age for IRAs has been raised to 72

The SECURE Act – Key Provisions Affecting Retirement & College Savings Plans

Retirement plan legislation passed by Congress, effective in 2020, includes changes affecting millions of American retirees. The Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act, was signed into law by the president on December 20th.

Inherited IRAs / Stretch IRAs 

Rules governing the distribution of funds from an Inherited IRA have changed, now mandating accelerated distribution and taxation of Inherited IRA funds that go to non-spouse individuals. Those most affected by the new rules are retirees with significant IRA balances who intend to leave funds to their children and grandchildren. Also referred to as Stretch IRAs, Inherited IRAs have traditionally allowed IRA beneficiaries to stretch distributions and taxes over an extended period of time. A current rule that will remain the unchanged is one that allows a spouse to rollover a deceased spouse’s IRA to a spousal IRA and take Required Minimum Distributions (RMDs) based on the surviving spouse’s life expectancy. Non-spousal beneficiaries such as children and grandchildren, the most common types of Inherited IRA beneficiaries, who will be required to distribute the entire balance within 10 years rather than “stretching” the distributions out. A challenge for Inherited IRA beneficiaries is the tax implication of accelerated distributions over a much shorter time horizon. Some beneficiaries may also run the risk of being pushed into a higher tax bracket by the accelerated distributions, especially if they are working.

Traditional IRAs

The 70 1/2 age limit for Traditional IRA contributions has been repealed, meaning that as long as an individual has earned income from working, they may contribute past age 70 1/2. The repeal is applicable to contributions made for tax year 2020 and thereafter, not for tax year 2019.

Required Minimum Distributions

The required minimum distribution (RMD) age for IRAs has been raised to 72 from 70 1/2. The new RMD age applies to those who turn 70 1/2 after December 31, 2019.

401(k) Plans

Small businesses are encouraged to set up retirement plans for their employees with an increased cap under which employees are automatically enrolled in a plan. Part-time employees who work either 1,000 hours annually or have three consecutive years with at least annual 500 hours of work are eligible for a 401(k) plan. Annuities will now become an option for employees taking retirement distributions from their 401(k) plan.

529 Plans

Qualified student loans may be repaid with 529 plan assets, in maximum allowable amounts of up to $10,000 annually. Parents may also use 529 assets for the birth or adoption of a child. (Sources: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/SECUREACT)